Essay on Partnership Taxation Homework

1033 Words Nov 27th, 2015 5 Pages
Freedom Drones, Inc. will be formed to mass produce and market drones that will be sold to the US government and various delivery services. Individual A and B will initially capitalize the company as described below. Your clients, Individual A and B, have asked you to consider the tax implications of the following initial contributions to the capital of Freedom Drones, Inc.

Individual A contributes cash of $50,000 and receives 10 shares of stock worth $50,000 in exchange for the cash contribution.

Individual B contributes a prototype for the drone with a FMV of $50,000 and an adjusted basis of $5,000. In building the prototype, B borrowed $10,000 from a bank. B will receive 8 shares of stock with a FMV of $40,000 and Freedom
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This transaction qualifies for nonrecogniton treatment under IRC section 351 in the following ways:

(1) The properties that A and B transferred satisfies the definition of property under IRC section 351. Under the definition, property includes cash, inventory, equipment, real estate, patents, or other intangibles such as goodwill or know-how. The prototype transferred by B belongs to know-how while A transferred cash directly.

(2) Since all substantial rights in the property, including A’s cash and B’s prototype, have been transferred to the company, this transfer satisfies requirements for transfer in Section 351.

(3) Section 351 (g) provides that debt instruments or nonqualified preferred stock do not qualify for section 351 treatment. In our case, the stocks transferors received are common stocks. Therefore, it qualifies for section 351 treatment with this respect.

(4) Section 368 (c) provides that to satisfy the “control” requirement in section 351, transferors of property should have ownership of 80 percent of the combined voting power of all stock and 80 percent of all other classes of stock. Section 351 also provides that transferors should be in control of the corporation immediately after the exchange. In this case, since A has a prearranged agreement with C to sell 2 shares of A’s stock immediately after the formation of the corporation, these 2 shares cannot be considered as A’s

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